Inflation and Intermediation by Depository Institutions

Abstract

The last twenty-five years have witnessed extraordinary changes in financial markets in the United States and in the Western world. These changes are a consequence of improvements in information processing, imbalances in growth rates of different countries, changes in convertibility and exchange-rate régimes, domestic regulatory and policy initiatives, and, of course, inflation and variations in other rates of return on assets. It is likely that inflation both caused institutional changes and was a consequence of them, but this paper focuses only on the former linkage.² While the paper emphasises the connection between inflation and portfolio behaviour by depository institutions in the United States, I believe there are counterparts in other countries represented at this conference.

Research support from National Science Foundation Grant Number SES-7920283 is gratefully acknowledged. Thanks are also due to Scott Happ who provided valuable research assistance, and to Professor David Small whose comments improved the paper’s readibility and economics.